Palm Gets a Wake-up Call
By Bryan Morgan, Thu Jun 14 00:00:00 GMT 2001

Or, how the little product that could became the big company that couldn't...


Pause with me to think back to a time when all was right with the tech world. Business productivity was being increased at a never-ending pace, allowing the corporate world to spend heavily on information technology that would continue to make workers more efficient.

The wireless Internet was the next great horizon and would be led by killer applications such as mobile commerce, wireless advertising, and location-based services. A vision of a society-wide pervasive computing environment - with the Palm OS leading the way - appeared to be just around the corner, fueled by large amounts of investor capital. Then... SLAM!

Perhaps what is most shocking about this rosy scenario is that it all seemed so close just a scant few weeks ago. "Traditional" software and hardware companies are now rapidly retooling to focus on tried-and-true business models while mobile computing pure-plays such as Palm are feeling the full effects of the tectonic shift of investors and customers away from mobile solutions.

Palm has seen its fortunes swing in such a way that they have, in a matter of months, gone from being the manufacturer of the most popular personal electronics item in history (the Palm Electronic Organizer Series) to being a company fighting for its very survival. How did this happen and what is the company doing to survive? More importantly, what does this portend for other mobile solutions?

Software? Hardware? Both?!?


Palm's multi-pronged strategy, on the surface, makes sense. The Palm line of organizers (led by the Palm V and new m500/m505 products) have been wildly successful while the Palm OS software platform (licensed by heavyweights such as Sony, Handspring, and IBM) is clearly the market leader with nearly 80% market share worldwide.

While many contend that Palm is a software company, the fact remains that 97% of their revenues currently come through the sale of hardware. Combine that knowledge with the following factoid: While Palm's Q3 revenues (in February) were US$470 Million, Q4 revenues are now estimated to be between US$140 and $160 Million! This is exactly half of the already lowered estimate and nearly 70% below the previous quarter's sales. On the heels of these announcements came news last week from Palm OS licensee Handspring that it, too, would miss sales estimates by nearly half.

After handing out layoffs earlier this year, Palm also recently announced that it would slash an additional 15% of its workforce to offset nearly $300 Million in unsold inventory it must dispose of. Too add insult to injury, Palm's entry into the enterprise application development/deployment market through an acquisition of Extended Systems was also called off in late May. More disturbing is the talk that Palm, the golden child of the mobile industry, is facing a cash crunch in the near future and may have to seek out secondary financing to remain viable.

Some analysts have even begun to hint at the necessity of a Handspring-Palm merger to consolidate the two companies' 70+% market share. However, it is important to keep in mind that Handspring's founders (Jeff Hawkins and Donna Dubinsky) originally fled Palm to found Handspring.

While we are certainly in the middle of the grand "shakeout" that many predicted over the past 2-3 years, it is apparent that a dominant company such as Palm could only have arrived at this predicament through a sequence of bad judgement, poor timing, and even worse luck.

While many cite the recent price war with Handspring as a reason for the sharp decline in both companies' revenue numbers, there is also the real possibility that, in a time of cost-cutting and belt-tightening, PDA are not deemed as "must" purchases by corporate IT departments and enterprise users.

At the same time all this was going on, Palm also became spooked by the early introduction of Handspring's slick new Visor Edge and pre-announced the release of their m500 and m505 products... months before the products were actually ready. The combination of price cuts (in which the price of many models have been slashed by nearly 50%), industry cutbacks, and a general wait-and-see attitude from consumers can be directly attributed to Palm's current difficulties.

The end... or a new beginning?


Despite the sharp drop-off in product sales over the past quarter, Palm is not a company with no defenses or plans for the future. In fact, that the company has been as successful as it is before the advent of a host of new technologies speaks volumes about the core product they are delivering (keeping in mind that the current hardware and software architectures are well over five years old).

Over the next 12 months, Palm is set to unleash a host of firsts beginning with the high resolution color m505, followed by the always-on "RIM Killer" m700, and a move to the more powerful StrongARM microprocessor platform for enhanced performance and capabilities. Palm's new Secure Digital Memory Card technology seeks to level the playing field with Springboard-enabled Palm OS devices from Handspring.

In fact, Palm has just announced the first Bluetooth module (with Toshiba) which will allow Palm devices to interoperate with Bluetooth-enabled devices such as scanners and printers.

On the software side, new tools such as the AppForge Visual Basic product and the recently released Java 2 Micro Edition virtual machine from Sun Microsystems will allow the hordes of Visual Basic and Java developers to painlessly move to the Palm OS.

Unlike years past, however, the Palm OS is not without serious oncoming competition from one time also-rans Microsoft Windows CE/Pocket PC and Symbian EPOC. Pocket PC, in particular, appears to be gaining traction having sold over 1.25 million units in one year's time from the product's introduction. While Palm clearly has a long-range plan to maintain, and even extend, its market share, all eyes will be on the company's short-term results as proof that its problems are only temporary.

If not, rest assured that a host of suitors will come calling in hopes of acquiring one of the leading brands in personal technology.

Bryan Morgan was the founder of WirelessDevNet.com (The Wireless Developer Network) and is currently an independent writer and software developer. He is a columnist for Wireless Internet magazine and is also a regular contributor to WirelessWeek.com and InformIT.com.